CCCTB may sig­nal the end of our fis­cal in­cen­tives

Mr Man­gion is a se­nior part­ner of PKF an audit and con­sul­tancy firm, and has over 30 years ex­pe­ri­ence in ac­count­ing, tax­a­tion, fi­nan­cial and con­sul­tancy ser­vices. He can be con­tacted at gmm@pkf­malta.com or on +356 21493041.

Con­cur­rently, the Com­mis­sion last week an­nounced plans to re­launch the CCCTB (Com­mon Con­sol­i­dated Cor­po­rate Tax Base) cam­ou­flaged as the elixir in tax sys­tems which shall de­liver a growth-friendly and more com­pet­i­tive regime in the Sin­gle Mar­ket. The Com­mis­sion had orig­i­nally pro­posed the CCCTB in 2011, but it proved too am­bi­tious and stalled.

Fol­low­ing the late tax scan­dals, the Com­mis­sion is ex­pected to shortly in­tro­duce this sys­tem in a two-stage process. The ap­pe­tizer on the menu is har­mo­niza­tion of the tax base fol­lowed by a main serv­ing styled “con­sol­i­da­tion“across the EU. The lat­ter is worked out us­ing a pre­scribed three-point for­mula (a one size fits all) to al­lo­cate prof­its to re­spec­tive mem­ber states where the group op­er­ates. So far there is no heinous move to steam roll a com­mon tax rate across the Sin­gle Mar­ket which goes against na­tional sovereignty rules. Many think that this will fol­low any­way. In my opin­ion, more de­bates should be or­ga­nized by pro­fes­sional bod­ies to in­form the com­mer­cial com­mu­nity on CCCTB – par­tic­u­larly to ex­plain how this could blunt the com­pet­i­tive edge of our tax in­cen­tives which so far has at­tracted sub­stan­tial in­vest­ment in fi­nan­cial ser­vices, avi­a­tion and iGam­ing sec­tors.

This does not mean that at­tempts to fight tax dou­ble tax­a­tion and ag­gres­sive tax plan­ning are not wel­come. Min­is­ter for Fi­nance Pro­fes­sor Sci­cluna stated that Malta can ac­cept tax avoid­ance leg­is­la­tion (such as ATAD) which in due course will be fully re­flected in our laws. How­ever, in his opin­ion, it is im­per­a­tive that Malta de­fends its im­pu­ta­tion sys­tem and there is con­sen­sus among lo­cally elected MEPs in Brus­sels to de­fend our patch in a highly com­pet­i­tive mar­ket for FDI.

It is a fact that due to our ge­o­graph­i­cal in­su­lar­ity, en­trepreneurs are hand­i­capped as the is­land has no raw ma­te­ri­als and suf­fers ex­tra lo­gis­ti­cal costs to im­port and ex­port its mer­chan­dise. Thus, we need EU sup­port to over­come such hand­i­caps. So far, the use of the full im­pu­ta­tion tax sys­tem has been the ful­crum around which fis­cal in­cen­tives are ac­ti­vated to at­tract FDI so that share­hold­ers are en­ti­tled to claim re­funds on tax cred­its im­puted on dis­tri­bu­tion of div­i­dends. The per­cent­age of re­fund de­pends on a num­ber of fac­tors but can be con­ve­niently cat­e­go­rized into two – ac­tive and pas­sive in­come. Var­i­ous rules are built in the tax code aimed to help start-ups and SMEs, in­clud­ing among oth­ers, ac­cel­er­ated rates of cap­i­tal al­lowances each ac­cord­ing to the in­dus­try sec­tor. Thus, for ex­am­ple, avi­a­tion ben­e­fits from a sixyear ac­cel­er­ated rate.

Th­ese rules will be oblit­er­ated by a com­mon base in­tro­duced by CCCTB. So far the CCCTB di­rec­tive was strongly op­posed by the tri­umvi­rate com­posed of Malta, Ire­land and the UK as it was con­sid­ered ush­er­ing in a one size fits all. Sadly, given the fact that the UK is leav­ing the EU, there will soon be only two small states among the 27 mem­bers (us and Ire­land) to stem the stam­pede of such leg­is­la­tion.

Ad­her­ents of CCCTB ar­gue that a com­mon cor­po­rate tax base would make it cheaper for SMEs to op­er­ate cross-bor­der in the Sin­gle Mar­ket as it re­duces sig­nif­i­cant fees charged by tax con­sul­tants when fill­ing com­plex re­turns deal­ing with up to 28 dif­fer­ent set of rules. The hype at Brus­sels an­nounc­ing the en­try of CCCTB says that time spent on an­nual com­pli­ance ac­tiv­i­ties should de­crease by eight per cent while the time spent set­ting up a sub­sidiary would de­crease by up to 67 per cent, mak­ing it eas­ier for com­pa­nies, in­clud­ing SMEs, to set up abroad. Once fully op­er­a­tional, the CCCTB could raise to­tal in­vest­ment in the EU by up to 3.4 per cent. As can be ex­pected, the full ben­e­fits of the CCCTB will only come about when both stages of the com­mon base and con­sol­i­da­tion are im­ple­mented.

So how will it af­fect Malta’s level of at­trac­tive­ness to FDI? The an­swer is un­cer­tain as CCCTB will be manda­tory only for en­ti­ties with global rev­enues exceeding €750 mil­lion a year. Per­haps a study can be com­mis­sioned by IFSP to find out the in­ci­dence of such com­pa­nies on the MFSA reg­is­ter. CCCTB is a belated move fol­low­ing the tax scan­dals that hit the head­lines when Ap­ple Inc. was fined over $13 bil­lion for tax eva­sion in Dublin, apart from other ear­lier in­stances re­vealed in the LuxLeaks and Swis­sLeaks re­port where multi­na­tion­als signed se­cret tax deals with au­thor­i­ties sav­ing bil­lions in taxes. The original idea in 2011 was to in­tro­duce CCCTB on a trial ba­sis but now, fol­low­ing the tax scan­dals and the BEPS study, it has be­come am­ply ev­i­dent that it must be manda­tory – to ratchet the fight against ag­gres­sive tax plan­ning.

To sugar the pill, the medicine is be­ing ad­min­is­tered in small doses. The con­sol­i­da­tion mea­sure has been put on the back burner while the em­pha­sis is to fast for­ward the part re­lat­ing to the cre­ation of a com­mon base. As can be ex­pected with this Tro­jan horse tech­nique, once the com­mon base is op­er­a­tional then con­sol­i­da­tion will be in­tro­duced steathily at the fi­nal step. There is an in­ge­nious recipe which tries to al­lo­cate prof­its to com­pa­nies within a di­ver­si­fied group on the strength of three eco­nomic cri­te­ria – cap­i­tal; labour; sales. Un­doubt­edly, Malta will stand to lose, as due to its size it can­not punch high in the for­mula par­tic­u­larly where the two fac­tors of labour and cap­i­tal are con­cerned unless ad hoc tax plan­ning is in­voked.

So what is CCCTB in prac­tice and how does the al­lo­ca­tion for­mula work? The notes is­sued by the Com­mis­sion state the mag­i­cal for­mula might not fit all sec­tors such as ship­ping or air trans­port; there­fore th­ese will be al­lowed to use an ad­justed ver­sion. A pos­i­tive side to CCCTB is the sup­port it gives to in­no­va­tion by al­low­ing the costs of R&D in­vest­ment to be fully de­ductible plus an ad­di­tional per­cent­age of the costs, de­pend­ing on cer­tain con­di­tions. This means the full cost of R&D plus an ad­di­tional 50 per cent de­duc­tion will be of­fered for ex­penses of up to €20 mil­lion. This is a wel­come mea­sure as Europe falls be­hind USA on the amount it in­vests in R&D. On the neg­a­tive side, as long as the CCCTB is not made manda­tory for all firms (within and out­side the EU), na­tional ad­min­is­tra­tions will ex­pe­ri­ence ad­di­tional com­pli­ance costs as they have to main­tain two par­al­lel sys­tems.

To con­clude, prima fa­cie unless CCCTB is mod­i­fied, Malta stands to lose part of its com­pet­i­tive edge once it is fully im­ple­mented. There is a lot at stake – fi­nan­cial and in­sur­ance ac­tiv­i­ties last year con­trib­uted €149 bil­lion or 98 per cent of to­tal FDI ac­cord­ing to NSO. iGam­ing com­pa­nies can eas­ily switch servers and re­lo­cate to non-EU domi­ciles.

Let us hope the six MEPs in Brus­sels in a unique sol­i­dar­ity ges­ture with all po­lit­i­cal par­ties in Val­letta will stand up to be counted in a cru­sade to op­pose it. They need to team up with Dublin­ers and oth­ers to jointly lobby against its roller coaster ef­fect. Prov­i­den­tially, there is a golden op­por­tu­nity next year to fight our patch dur­ing our pres­i­dency of the EU.

Alice in Won­der­land re­minds us sternly that the clock is tick­ing and in or­der to save the myth­i­cal Hat­ter, Malta can­not hide its head in the sand.